Farnsworth v. F.C. of T.
(1949) 78 CLR 50423 ALJ 308
9 ATD 33
(Judgment by: Dixon J)
Farnsworth
v. Federal Commissioner of Taxation
Judges:
Latham CJ
Rich J
Dixon JMcTiernan J
Webb J
Subject References:
Income Tax (Cth)
Judgment date: 4 August 1949
Judgment by:
Dixon J
This is a case stated pursuant to s. 18 of the Judiciary Act 1903-1948 in an appeal under s. 196 (1) of the Income Tax Assessment Act 1936-1948 by a taxpayer against a decision of a Board of Review.
During the year ending 30th June 1943 the taxpayer became a horticulturist. She grew berry fruit. She was or became a member of the local branch of the Australian Dried Fruits Association. She sent the dried fruits the products of her horticulture to a packing house registered with that association. Dried fruits sent by growers to the packing house were graded, processed and packed and sold through agents registered with the association and the proceeds, after the deduction of packing and other charges, distributed among the suppliers ratably according to parity in respect of the grade, description and quantity of the dried fruit sent into the pool. The packing house does not await the disposal of the dried fruit in the pool before making any payments to the grower. Monthly progress payments of so much a ton are made to the suppliers, beginning with an immediate payment called a 'door payment.' By 30th June 1943, the end of the fiscal year, the taxpayer had received in this way sums amounting to PD340. But the packing house made an estimate as at 30th June of the net proceeds which it anticipated it would receive from the sale of the dried fruit in the pool and become available for distribution, and it furnished each grower with a statement of the net balance of his estimated share after allowing, of course, for payments the grower had received. The amount that it was estimated the taxpayer would receive was estimated at PD648. In assessing the taxpayer's income derived during the year ending 30th June 1943 the commissioner included the sum of PD648 as part of her assessable income as well as the sum of PD340 and the majority of the Board of Review upheld the assessment. The ground for including the sum of PD648 was that it represented the value of the taxpayer's stock in trade on hand at 30th June 1943.
The case, which I stated at the request of the parties, seems to me now to be somewhat defective in failing to give a more precise account of the dried fruits pool into which the taxpayer sent the products of her horticulture. A document called a consolidation of the Rules Regulations and Practices of the Australian Dried Fruits Association is annexed. The information obtained from this document about the pooling of dried fruit is meagre. Moreover it contains not a few provisions likely to be the source of confusion until upon closer examination it is seen that they cannot be applicable to such a pool as concerns us. But the reasons of the members of the Board of Review are also annexed and fortunately they contain sufficient information to enable us to decide the questions before us. As s. 18 of the Judiciary Act authorizes a reference upon which the court can decide fact and law, it does not seem to matter that we are drawing inferences of fact. As I understand the arrangement, the packing house, either by itself or in combination with other named packing houses, accepted dried fruits from the growers on the terms that, without discriminating between one grower's fruit and another, the fruit should be graded, processed and packed and sold and that a "pool" of the total proceeds of each variety of fruit should be formed. The packing house provided the growers with cases, called sweat boxes, in which they placed their dried fruits, and delivered them to the packing shed. There the fruit was weighed in the sweat boxes and delivery dockets were given showing weight, grade and variety. The dried fruit was tipped from the sweat boxes into a hopper, where of course it lost its identity as the fruit of the particular supplier. Growers doubtless delivered fruit day after day and the work of the shed proceeded in grading, processing and packing the fruit that flowed into the hoppers. The sale of the packed fruit and its dispatch for delivery apparently continued over some months. The earlier progress payments did not depend upon the flow of receipts into the pool, though probably later payments did so, and certainly the final payment. An account was kept for each variety of fruit pooled. The account was credited with the amounts arising from the sale of packed fruit of that variety. It was debited with the packing and marketing charges. At the end, when the net proceeds of all the fruit in a pool was ascertained, complete account sales were rendered to the growers who had sent fruit into that pool. It is of course evident that in estimating as at 30th June the amounts that the pool, into which the taxpayer's fruit went, would return to the respective growers in excess of what they had already received the packing house was not stating what fruit remained in its hands at that date unsold. It was estimating the final result of the pool after deducting progress payments which had been made independently of sales by the packing house. The estimate was consistent with sales having been made of almost all the fruit packed or of very little of it. But unfortunately, in a list furnished by the packing house to the commissioner, the estimated further returns were shown in a column headed "Value of fruit unsold at 30th June 1943." Perhaps the heading led to the commissioner's treating the amount of PD648 opposite the taxpayer's name as the value of her stock in trade on hand at 30th June 1943. In my opinion it is not possible to treat the sum as the value of the taxpayer's stock in trade on hand at the end of the accounting period. The taxpayer's dried fruit had ceased to be "on hand" within the meaning of s. 28 of the Income Tax Assessment Act 1936-1943 when she delivered it to the packing shed. The packing house cannot be treated as a mere agent of the taxpayer holding her stock in trade for sale. The taxpayer's dried fruit had been delivered irrevocably to the packing house upon terms, complicated no doubt, which entitled her to a money sum and left her with no dispositive power over the fruit and no power to direct or control the disposal by the packing house of the fruit either alone or in combination with other suppliers. Of course the packing house was contractually bound to process, pack and sell the fruit in the appointed manner. The obligations it incurred have, I imagine, a fiduciary character. For the packing house is bound to account for the proceeds of the fruit pooled and to make a proper distribution. But, if it matters, I should have thought the property in each parcel of fruit delivered into the pool passed to the packing house. Whatever contractual and equitable rights each grower or all growers possessed to enforce the obligations of the packing house they could not be considered "stock in trade on hand" of each individual taxpayer. It does not appear to me to be right to treat all the dried fruit of a variety which at a particular time is in the hands of the packing house as the property in co-ownership of all or some number of the suppliers of fruit of that variety to the season's pool. It was delivered on terms which do not contemplate co-ownership at law; and, as for trust, I should have thought that the equitable rights of a supplier in relation to the pool were of a very special nature. However, I do not think that it matters much. For in any case it appears to me to be out of the question to treat an interest of the kind suggested as stock in trade of the taxpayer on hand. If further confirmation of this conclusion is sought, it can be found by attempting to apply s. 31. For the commissioner, as an alternative ground for the assessment, it was contended that the delivery of the dried fruit to the packing shed so that it went into the pool was a transaction falling within s. 36 (1). That provision deals with the case of a taxpayer's disposing of the whole or any part of the assets of a business. If the whole or any part of such assets are disposed of by sale or otherwise howsoever, whether for the purpose of putting an end to the business or any part thereof or not, and the assets include any property being, among other things, trading stock, then the value of the property must be included in the taxpayer's assessable income. This provision is generally considered to have no application to the regular disposal of trading stock in the ordinary course of carrying on a business. In my opinion that is the correct view of s. 36 (1). The ordinary course of carrying on the taxpayer's business or pursuit of horticulture involved the sending of her products to a dried fruits pool. I think that s. 36 (1) does not apply to her case. A third ground was taken for the commissioner in support of the assessment. It is said that the taxpayer carried on a business in which she produced a commodity and turned it into money. The proceeds of such a business should be assessed, it is urged, on an earnings basis, that is by a comparison of the position of the business at the beginning and end of an accounting period, taking into account all accruals and outstandings. Trading stock is defined in the Act, s. 6, to include anything produced. From this it may be seen, it was said, that the Act contemplates such a basis of assessment for primary production. Therefore, so it was contended, the sum of PD648 should be taken into the accounts of the business as an outstanding for the year of income ending 30th June 1943. The argument has, I think, weight; but it involves difficulties. The sum expected to arise from the pool cannot be described as a debt. If the sum was not realized in the ensuing accounting period, the deficiency could not be brought within s. 63. If the deficiency could be brought in as a loss or debit it must be on general principles of accounting. To bring it in somehow would be essential to a fair assessment. Yet the structure of the Act is hardly consistent with a debit which will not fall within any category of authorized deduction. It could not readily be brought within s. 51. These are some of the difficulties. I hesitate in the present case to lay down any proposition of universal application about anticipated dividends from pools of primary products. But it does seem to me that the natural solution of a case like the present, which is a simple case, is to ascertain the taxable income of the taxpayer on the basis of receipts and outgoings. After all, as was remarked by Mr. Gibson, who dissented in the Board of Review, the payments were not "got or obtained" by the taxpayer before she received them. He said that the payments were undoubtedly assessable income derived by the taxpayer at, but not before, the respective times when the payments were received; they were required to be made to her under the rules adopted by the contract but the amounts and the times of the payments were at the discretion of the packers concerned. I agree in this view. In my opinion the questions in the case stated should all three be answered "No."